Advanced Micro Devices (AMD +2.06%) has turned out to be a lucrative investment in 2021. Shares of the chipmaker have appreciated close to 70% this year, driven by the consistently strong growth of the company's top and bottom lines.
However, as the stock price chart below indicates, AMD stock has witnessed some volatility of late thanks to inflationary concerns and the threat posed by the coronavirus omicron variant, which has led to a surge in infections. Will these problems derail AMD's impressive run in 2022? Or will this hot tech stock enjoy another year of outstanding stock price growth?
Let's find out.
AMD data by YCharts
Why AMD stock may fall
AMD expects to end 2021 with an estimated revenue increase of 65% over last year. The chipmaker could deliver $16 billion in revenue this year, as compared to $9.8 billion in 2020, while earnings are expected to more than double to $2.63 per share, as compared to $1.29 per share last year. However, consensus estimates suggest that AMD may not grow at such an eye-popping pace in 2022.
The company's revenue is expected to increase at a relatively slower rate of 19% in 2022 as per Wall Street estimates, while earnings growth is expected to drop to 27%. With AMD stock trading at nearly 45 times trailing earnings and 12 times sales, Wall Street might not like a drop in its pace of growth -- especially considering that the S&P 500 index sports an earnings multiple of nearly 29 and has a sales multiple of 3.28.
At the same time, a broader market weakness may turn out to be another headwind for AMD stock. Goldman Sachs' analysts now expect the U.S. economy to grow 3.8% in 2022, down from its earlier forecast for 4.2% growth. The analysts cite the concerns and risks that may arise out of the spread of the omicron variant when explaining the decision to slash the U.S. economy's growth estimates for next year.
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The spread of the new variant could also exacerbate the supply chain issues that have plagued the semiconductor industry in recent months, leading to a potential loss of sales for AMD if it can't make enough chips to satisfy end-market demand. All this indicates that AMD stock may get off to a shaky start in 2022 on account of factors out of its control. However, any weakness in the stock can be treated as a buying opportunity, since there are several reasons why AMD could blast higher in 2022 and beyond.
Why the stock could soar
If we look past the virus-related concerns and the impact they may have on AMD in the near term, it is easy to see that the company is sitting on several catalysts that should help it sustain its impressive growth in 2022 and beyond.
For instance, the company's enterprise, embedded, and semi-custom (EESC) business is set for another year of solid growth thanks to the data center and gaming console markets. This segment produced 44% of AMD's total revenue in the third quarter, recording 69% growth over the prior-year period to $1.9 billion. AMD credited the segment's terrific growth to an increase in sales of its EPYC data center processors and semi-custom chips, which are used in gaming consoles.
What's more, gaming console sales are expected to step on the gas in 2022. Sony expects to sell 22.6 million PlayStation 5 consoles in the fiscal year that begins in April 2022, which would be a jump of 53% over the current fiscal year's projected sales of 14.8 million units. Meanwhile, Microsoft is expected to ship 21 million units of the Xbox Series X console in 2022, as compared to 2021's estimate of 12 million units.
This is great news for AMD's EESC business, as both Microsoft and Sony use its semi-custom chips in their consoles. On the other hand, AMD's consistent share gains in the server market bode well for the company going into 2022, as this is a multibillion-dollar opportunity.
Market research firm Omdia estimates that AMD's share of the server CPU (central processing unit) market increased two percentage points quarter-over-quarter in the third quarter to 18%. Bank of America analyst Vivek Arya expects AMD to corner a 25% share of the server market in 2022, which could give AMD a sizable boost next year and beyond, as the server CPU market is expected to clock $19 billion in revenue by 2023.
The computing and graphics segment is turning out to be another happy hunting ground for AMD, as the segment's revenue increased 44% year over year in the third quarter to $2.4 billion. AMD pointed out that the segment's growth was driven by an increase in sales of its Ryzen processors, Radeon graphics cards, and data center accelerators. Additionally, AMD saw stronger average selling prices (ASPs) during the quarter.
AMD's CPU market share was close to 15-year highs at almost 25% at the end of the third quarter, and the company is expected to gain additional share in 2022 and beyond. On the other hand, the secular growth of the graphics cards market will be another tailwind for the chipmaker. Jon Peddie Research estimates that sales of graphics cards could increase to $54 billion in 2025 from $23.6 billion last year. As AMD holds 17% share of the GPU market, it stands to gain from the overall market's growth going forward.
So the reasons why AMD stock could fly in 2022 outweigh the reasons why it could fall. That's why investors should continue holding on to this high-flying tech stock going into the New Year, as it seems primed for more upside.
